Question

The information that follows pertains to Richards Refrigeration, Inc.:

1. At December 31, 2018, temporary differences existed between the financial statement carrying amounts and the tax bases of the following:

	($ in millions)
	Carrying Amount			Tax Basis			Future Taxable (Deductible) Amount
Buildings and equipment (net of accumulated depreciation)	$	140		$	100			$	40
Prepaid insurance		60			0				60
Liability—loss contingency		35			0				(35	)

2. No temporary differences existed at the beginning of 2018.
3. Pretax accounting income was $210 million and taxable income was $145 million for the year ended December 31, 2018. The tax rate is 30%.

Required:
1. Complete the following table given below and prepare the appropriate journal entry to record income taxes for 2018
2. What is the 2018 net income?
  

Answer 1

Solution 1:

Particulars	Amount (In millions)	Rate of Tax	Tax (In millions)	Recorded as
Pretax accounting income	$210.00
Permanent difference	$0.00
Income subject to taxation	$210.00	30%	$63.00	Income tax expense
Temporary differences:
Depreciation	-$40.00	30%	-$12.00	Deferred tax liability
Prepaid insurance	-$60.00	30%	-$18.00	Deferred tax liability
Liability - Loss contigency	$35.00	30%	$10.50	Deferred tax assets
Income taxable in current year	$145.00	30%	$43.50	Income Tax Payable

Journal Entries
Date	Particulars	Debit (In million)	Credit (In million)
31-Dec-21	Income tax expense Dr	$63.00
	Deferred tax assets Dr	$10.50
	To Income taxes payable		$43.50
	To Deferred tax liability		$30.00
	(To record income tax expense)

Solution 2:

Net income for 2018 = Pretax financial income - Income tax expense = $210 - $63 = $147 million